Reverse Mortgages
WHAT IS A REVERSE MORTGAGE?
A Reverse Mortgage is a unique loan program that enables homeowners that are age 62 and older to use their equity without creating a monthly payment obligation. Thus, the reverse mortgage program enables seniors that may be "real estate rich and cash poor" to unlock the financial potential in their homes, and let their homes work for them. Additionally, the reverse mortgage has no income or credit requirements to qualify.
In general, the reverse mortgage does not become payable until the senior homeowner no longer occupies the property as his primary residence. At that time, the outstanding principle and the accrued interest become due. Typically, the loan is paid off with the proceeds of the sale of the home from the borrower's estate. However, the borrower's estate/family may decide to refinance the loan and retain the property. Any proceeds in excess of the amount owed to the lender belong to the borrower or the borrower's estate.
Thus, the reverse mortgage is simply a loan against the borrower's principle residence. The borrower retains ownership of the home. If the borrower decides to sell the property any funds in excess of the payoff amount belong the borrower, as is the case with a regular mortgage or home equity loan.
WHAT ARE SOME OF THE COMMON USES OF THE REVERSE MORTGAGE?
- Pay off existing mortgages.
- Free up monthly income.
- Do home improvements.
- Pay off credit card debts.
- Pay for in-home health care.
- Purchase long term care insurance
- Supplement income.
- Plan your estate.
- Purchase a car.
- Travel.
- Prepare for emergencies.
- Help family members.
WHO IS ELIGIBLE FOR A REVERSE MORTGAGE?
Reverse mortgages are available to homeowners that are age 62 and older. All persons listed on the deed to the property must be at least age 62. The borrower must occupy the property as his primary residence and all existing liens must be paid off at the time of settlement. Thus, the proceeds of the reverse mortgage are available to pay off any outstanding mortgages against the property. As an additional safeguard, HUD requires that each potential reverse mortgage borrower be advised about the reverse mortgage program by an independent HUD-approved counseling agency. This counseling is free of charge to the borrower.
WHAT ARE THE BENEFITS OF A REVERSE MORTGAGE?
There are several benefits associated with the reverse mortgage. First, there are no income or credit requirements when qualifying for this loan. Second, the money received from this loan is not taxable as income¹. Third, the borrower has no repayment obligations until the property is no longer his residence. Thus, the borrower may live in the property until his death without ever making a payment back on the loan. Another significant benefit of this loan is the security of knowing that reverse mortgages are fully insured under the federal government's Federal Housing Administration's mortgage insurance program.
¹ Consult your tax advisor
WILL THE BORROWER BE TAXED ON THE PROCEEDS FROM THE REVERSE MORTGAGE?
No, the borrower will not be taxed on the principle received from the reverse mortgage because this is a loan and therefore is not taxable as income.
WHAT TYPES OF PAYMENT PLANS ARE AVAILABLE?
A borrower may choose among several payment options.
1. The monthly payment option allows the borrower to choose to receive (a) (the Tenure Plan) monthly payments of a certain calculated amount over the borrower's lifetime or (b) (the Term Plan) a certain amount that is chosen by the borrower over a term of years until the funds are exhausted. This monthly payment option enables the borrower to supplement his income with payments on the first of each month for either as long as the borrower resides in the home or until the funds are exhausted. Thus, even if the borrower has used all the available funds, the loan does not become due until the borrower no longer lives in the property as his principle residence.
2. The Lump Sum Payment option allows the borrower to take all of the available funds at the time of settlement. Again, the loan does not become payable until the borrower no longer resides in the property as his principle residence.
3. The Line of Credit option places the reverse mortgage proceeds in an account that is available to the borrower whenever a need arises. The borrower determines when and how much money is to be withdrawn from the account. This enables the borrower to control the accrual of interest because interest is charged only on the money the borrower has taken. Additionally, the funds that remain in the Line of Credit will continue to grow, making more funds available to draw on at a later time.
Regardless of the payment option chosen, the borrower may use the available funds for any reason, whatsoever.
It should also be noted that each individual case is different. A great feature of the reverse mortgage is that the borrower may combine any or all of these options in order to customize a payment plan that will meet the borrower's unique financial situation.
CAN THE SENIOR BE FORCED TO SELL OR VACATE THE HOME IF THE MONEY OWED ON THE LOAN EXCEEDS THE VALUE OF THE HOME?
A reverse mortgage borrower has three (3) responsibilities:
- Occupy the property as his primary residence;
- Keep homeowner's insurance on the property throughout the life of the loan; and
- Pay all real estate property taxes and other property assessments throughout the life of the loan.
Thus in general, as long as the borrower can satisfy these requirements, the borrower will NEVER be forced to sell or vacate the property. Accordingly, even if the mortgage balance exceeds the property value, or if the borrower has exhausted all of the available funds, the borrower can NEVER be forced to sell the home
Additionally, when the loan does finally become due, the reverse mortgage lender is only secured to the real property. Thus, the lender can only look to the value of the real estate for repayment of the reverse mortgage and not any other asset in the borrower's estate. Furthermore, neither the borrower nor the borrower's estate will be subject to any claim that may arise if the value of the property is less than the payoff of the reverse mortgage. FHA mortgage insurance will cover any balance due the lender.
HOW DOES A REVERSE MORTGAGE DIFFER FROM A HOME EQUITY LOAN?
While both reverse mortgages and home equity loans enable senior homeowners to turn the equity in their home into spendable dollars, there are important differences between these two types of mortgages.
First, home equity loans require regular monthly payments in order to repay the loan. These payments begin as soon as the loan is settled. In contrast, a reverse mortgage does not have to be repaid as long as the home remains the senior's primary residence. In other words, the loan becomes due only when the senior no longer occupies the property.
Second, home equity loans are based on the borrower's income and credit history. A home equity loan borrower may be required to requalify for the home equity loan each year. If the borrower does not qualify, than the lender may require that the loan be paid in full immediately. However, income and credit are not obstacles for seniors who want a reverse mortgage because there are absolutely no income or credit requirements to qualify. It should also be noted that there are no requalification requirements.
WILL THE BORROWER'S HEIRS OWE ANYTHING TO THE LENDER UPON THE DEATH OF THE BORROWER?
Upon death, the loan balance becomes due and payable. The estate may repay the loan by either selling the home or by refinancing the mortgage. If the loan exceeds the value of the property, the estate will owe no more than the value of the property. No additional financial claims may be made against the heirs or the estate. In a worse case scenario, nothing more than the value of the real estate is ever at risk to the borrower's heirs because of a reverse mortgage.
WILL REVERSE MORTGAGE PAYMENTS AFFECT SOCIAL SECURITY, MEDICARE, SUPPLEMENTAL SECURITY INCOME (SSI) OR MEDICAID BENEFITS?
Reverse mortgage payments do not affect Social Security or Medicare benefits because those benefits are not based on the assets of the borrower. However in certain programs, beneficiaries must keep their liquid assets under certain limits. Generally, if the proceeds from the reverse mortgage are not spent in the month received, then these funds are considered part of the liquid assets and may adversely affect eligibility for SSI and other programs. Therefore, a borrower who also receives SSI or participates in other income or need based programs should never draw more money than the borrower actually needs to spend that month. Regulations for state-administered programs such as Medicaid and food stamps all have different eligibility requirements. Accordingly, it is suggested that the borrower consult their attorney, financial advisor, or a benefits specialist at the local area Agency on Aging or the local offices for these programs to determine how reverse mortgage payments may affect the borrower's particular situation.
WHERE CAN I GET MORE INFORMATION ON REVERSE MORTGAGES FOR SENIORS?
To learn more about reverse mortgages and other types of financial alternatives, please contact Larry Glasgow at: 301-270-5703